May 14, 2018

Do you have a bunch of different debts? Do you get overwhelmed by multiple monthly payments and growing interest fees? You’re not alone.

As of December 2017, there was over $1 trillion in revolving debt in the United States. When divided by the number of adults who have credit cards, that averages out to over $5,000 of credit card debt per person. Some people have more, some have less. But the fact is, many, many people are dealing with credit card debt in the United States.

All that said, having many different accounts to worry about, and having variable interest rates, can be a hindrance to paying down debt. In these situations, consolidating your debt can be a great way to simplify things and save money over time. But it can be scary and confusing when looking into your options for consolidation. So I summarized for you.

1. Personal Loan

A personal loan is a loan you can take out to basically pay for anything. The good thing about personal loans is they tend to have lower interest rates than credit cards. I’ve seen rates as low as 5%, which can save you a lot of money in interest. It’s also a helpful way to borrow a larger sum and pay off your multiple credit cards and then only have one low-interest bill to pay back. (Don’t forget: your credit score will determine the interest rate that you are given.)

A personal loan will be deposited into your bank account as a lump sum as soon as it’s approved and you sign the agreement. DON’T SPEND THIS CASH ON ANYTHING ELSE. Immediately apply the amount towards the debt that you are paying off. I once had a client who started spending the money from her personal loan while it was still in her bank account. This made it so that she wasn’t able to pay off the full amount on her credit cards like she planned.

One downside of this option is that there can be an origination fee for the loan. That means that you’re charged an additional fee that equals a percentage of the loan you’re taking out. Depending on the amount of the loan, that can be a big number. It’s a good practice to compare what you’re paying in interest to what you’d be paying for the origination fee. Even better, look for a company that doesn’t charge origination fees. Another thing to look for is whether or not the loan provider charges penalties for paying off your loan early. You want to make sure to choose a company that will not penalize you if you manage to pay your loan off ahead of schedule. So make sure to read the fine print and ask questions!

I’m sure you’ve seen many credit cards out there that offer balance transfers for 0% interest for a period of time. These cards allow you to transfer the balances from other credit cards to just one card that doesn’t charge interest for the introductory period. This can be a great way to save on big interest fees that you are paying on your existing credit cards. It’s also a nice way to simplify your bills so you only have to focus on paying down one card each month.

One downside of this option is that there is usually an origination fee for your balance transfer. That means that you are charged a lump sum that equals a small percentage of the debt you’re transferring. Depending on the amount of debt, that sum can be a lot of money. Plus, once the introductory period is over, the interest rate will go way up. That means if you don’t pay off your debt during that initial period, you will have to start paying interest on it again later.

Make sure you don’t add any new spending to the card you’ve transferred your balances to. You want to make sure you only need to pay back the amount you transferred, not any additional debt. It’s also important to stop using the credit cards you already had. You don’t want to get stuck in a pattern of transferring your debt over and over and never seeing the end.

This consolidation option only applies to people who own a home. When you own a home, your property (hopefully) appreciates in value over time. This is especially true if your area is becoming more popular or experiencing more development. When this happens, your house is worth more than you originally paid for it, which means you have more equity in the home. A home equity loan, or a home equity line of credit (HELOC), allows you to borrow against that equity. Some people use that money to pay for improvements on the house, but you aren’t required to do so. You can borrow against the equity of your home for anything you want.

With a home equity loan, the interest rates tend to be much lower than a credit card. This can save you money in interest over time. However, a home equity loan is kind of viewed as a second mortgage, so closing costs can be involved. Closing costs can add up to quite a bit of money, so it’s important to weigh the costs of your credit card interest versus your home equity loan closing costs.

A HELOC is different because it is like a second mortgage, but actually functions more like a credit card. Instead of borrowing a lump sum, you borrow against your equity as you need it. In this case, you only pay interest on the amount that you actually borrow, not the amount that is available to you.

Of course, it’s important to remember that you’re borrowing money against your own home. So you’re effectively using your house as collateral to pay off your other debts. That can get dangerous if you’re having trouble paying back the home equity loan, so make sure to only borrow what you know you can afford to pay back.

In this scenario, you work with a third party, a credit counseling organization, that handles the debt consolidation for you. With this option, all of your credit cards are closed and you pay one monthly payment to the organization, which then pays the money to the creditors you owe.

This is a good option for you if you really struggle with overspending and have a hard time getting and staying out of debt. It also simplifies your debt into one standard payment over a set amount of time. A potential downside of this option is that your credit card accounts are closed. This can hurt your credit score if you’re closing accounts you’ve had for a long time. But it might end up being more helpful to your credit down the line if it helps you pay off your debt and stay out of it.

For more information on choosing a credit counselor, check out this article from the Federal Trade Commission.

5. Borrowing from Retirement

I would consider this your absolute last resort. You should leave your retirement savings alone at all costs. However, it is an option for consolidation if you really need it. Basically, you take a loan from your retirement account to pay off existing debt. Different employers have different rules, but typically, you can borrow up to $50,000, or half the balance in your account, whichever is less, from a 401k or similar plan like a 403b. You then gradually repay the money, plus interest, to your own account. One upside is that you’re paying the interest back to yourself, rather than to a company.

A big downside is that if you left your employer for a new job, you’d have to pay back the amount you owe right away. And if you are unable to pay the money back, at any point, you’ll be taxed and penalized as if you’ve withdrawn your retirement money before retirement age. This can cost you a heck of a lot more money than the original loan.

And more importantly (in my opinion), this option can set you back in your retirement savings. According to Fidelity, 20% of people who take out a 401k loan decrease their retirement contributions, and 15% of people stop their contributions completely within five years of taking out the loan. Plus, when your money is out of the stock market, you’re losing out on growth potential. This can really hurt you when you get to retirement age.

It’s important to remember that debt consolidation does not mean your debt is going away. It’s not a magic eraser. You still have to work to pay down your debt in its new form. And the most important thing to remember is that you must continue to be careful with your spending. It can be very easy to build up debt again after you’ve consolidated. If you tend to struggle with credit card debt, stop using your credit cards after you consolidate. Otherwise, you may find yourself in this situation again in a couple years.

Maggie is a Certified Financial Education Instructor and financial coach for women. She founded Maggie Germano Financial Coaching with the mission to provide women with the support and tools they need to take control of their money and achieve their goals. She does this through one-on-one coaching, monthly Money Circle gatherings, writing, and workshops. Follow Maggie on Twitter, Instagram, and Facebook, and join her Money Circle group! For more information, or to contact Maggie directly, visit her website.